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Sometimes a lot can be said in a single sentence
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Greg Bell
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Here you go..........
In financial markets, collateralized debt obligations (CDOs) are a type of asset-backed security and structured credit product. CDOs gain exposure to the credit of a portfolio of fixed-income assets and divide the credit risk among different tranches: senior tranches (rated AAA), mezzanine tranches (AA to BB), and equity tranches (unrated). Losses are applied in reverse order of seniority and so junior tranches offer higher coupons (interest rates) to compensate for the added risk. CDOs serve as an important funding vehicle for portfolio investments in credit-risky fixed-income assets.
In financial markets, collateralized debt obligations (CDOs) are a type of asset-backed security and structured credit product. CDOs gain exposure to the credit of a portfolio of fixed-income assets and divide the credit risk among different tranches: senior tranches (rated AAA), mezzanine tranches (AA to BB), and equity tranches (unrated). Losses are applied in reverse order of seniority and so junior tranches offer higher coupons (interest rates) to compensate for the added risk. CDOs serve as an important funding vehicle for portfolio investments in credit-risky fixed-income assets.
Brad Ellis
Senior Member
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- Feb 7, 2006
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- Certified Residential Appraiser
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- California
Lee Ann,
There are 3 investment vehicles that are in play- CMOs, CDOs and SIVs.
CMO= Collateralized Mortgage Obligations
CDO= Collateralized Debt Obligations
SIV= Structured Investment Vehicles
CMOs consist of only mortgages. CDOs blend in other types of debt including equipment leases, car leases, etc. SIVs are typically offshore corporations that purchase CDOs. Generally they are not held on a lender's books but often end up on the books if a bank has guaranteed the debt. A few were recently taken on book by Citi.
Greg's textbook definition is accurate except that some of the CDOs took on only portions of CMOs- the riskiest tranches rated BB or lower. Couple that with risky loans of other types and it is not surprising that so many went south. Put risk with more risk and the effect is exponential; hence the massive write offs.
BTW, it is this for the most part that has caused some of the major writeoffs by Wall St. and some banks.
Hope that helps.
Brad
There are 3 investment vehicles that are in play- CMOs, CDOs and SIVs.
CMO= Collateralized Mortgage Obligations
CDO= Collateralized Debt Obligations
SIV= Structured Investment Vehicles
CMOs consist of only mortgages. CDOs blend in other types of debt including equipment leases, car leases, etc. SIVs are typically offshore corporations that purchase CDOs. Generally they are not held on a lender's books but often end up on the books if a bank has guaranteed the debt. A few were recently taken on book by Citi.
Greg's textbook definition is accurate except that some of the CDOs took on only portions of CMOs- the riskiest tranches rated BB or lower. Couple that with risky loans of other types and it is not surprising that so many went south. Put risk with more risk and the effect is exponential; hence the massive write offs.
BTW, it is this for the most part that has caused some of the major writeoffs by Wall St. and some banks.
Hope that helps.
Brad
Terrel L. Shields
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or this one.. 1-800-SHO-OTME
The worst misapplication of risk management that has ever hit the markets. It was as though there was no risk to the owner of such.
It would be as risky as betting the ranch on a single roll of dice or drilling a single wildcat oil well with the last dollar you owned.
Mike Seward
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- Jan 23, 2002
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- Certified Residential Appraiser
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- Florida
I'll jump in here, too because it could get worse. Everyone go back and read the second sentence in Greg's post above.
"CDOs gain exposure to the credit of a portfolio of fixed-income assets ........."
In other words, the owner of a CDO does NOT own the underlying assets. They own the rights to the cash flow from the assets and the associated risks in accordance with the cash flow and risk assignment rules of the CDO.
The CDO owner has a position in a synthetic entity that has defined risk and reward. The owner is Dependant on not just the quality of the underlying assets, but also of the quality of the metrics and assumptions the CDO creator used for defining the risk and reward of the tranches.
So, the huge question is: if the CDO owner doesn't own the underlying assets, can they foreclose on them???
An Ohio court recently said "NO'.
Below is an article from Moneynews.com
[FONT='Arial','sans-serif']Trillions in CDOs Could Be Stuck in Court[/FONT]
[FONT='Arial','sans-serif']Another worry for big banks: They might have trouble even proving they own your home. [/FONT]
[FONT='Arial','sans-serif']The massive repackaging of loans into collateralized debt obligations (CDOs) — $6.5 trillion in outstanding securitized mortgage debt, by one estimate — is making it hard enough to price investment risk. [/FONT]
[FONT='Arial','sans-serif']But a recent court ruling could make it hard for banks to foreclose at all, adding to the potential losses as each case ends up in court instead, adding interminable legal time to the process. [/FONT]
[FONT='Arial','sans-serif']Ohio Federal Court Judge Christopher A. Boyko dismissed 14 foreclosures actions brought on behalf of mortgage investors. He ruled that they failed to prove their ownership of the properties on which they wanted to foreclose. [/FONT]
[FONT='Arial','sans-serif']In a nutshell, here’s the problem: Mortgage notes put in securitization pools typically appear as data transfers rather than actual legal transfers, a move intended to speed the process. [/FONT]
[FONT='Arial','sans-serif']However, if the mortgage note in question has not been legally transferred and assigned to the securitization trust, the trust has no legal standing to foreclose. [/FONT]
[FONT='Arial','sans-serif']“The institutions seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliance. Finally put to the test, their weak legal arguments compel the court to stop them at the gate,” Boyko wrote in his ruling. [/FONT]
[FONT='Arial','sans-serif']Industry observers and consumer advocates note that mortgage securities make fixing troubled loans difficult because their complex structure and disparate ownership make identifying just who hold their mortgage notes difficult if not impossible. [/FONT]
[FONT='Arial','sans-serif']"This court ruling in Ohio means that the securitized trusts own nothing," according to Bob Chapman of the International Forecaster. "The investors in these securities might have assumed — wrongly, it turns out — that they actually owned some real estate in these deals. The problem is, they own nothing." [/FONT]
[FONT='Arial','sans-serif']The ruling involves foreclosure actions brought by Deutsche Bank National Trust Company, which acts as trustee for the mortgage securitization pools that claimed to hold the underlying mortgages DBNTC wanted to reclaim. [/FONT]
[FONT='Arial','sans-serif']Deutsche Bank attorneys provided documents that showed intent to convey mortgage rights rather than actual proof of mortgage ownership on the date the foreclosure actions were filed. [/FONT]
[FONT='Arial','sans-serif']The Ohio court’s action is expected to bolster the position of attorneys representing distressed borrowers and may encourage other judges to demand more compelling evidence of ownership from lenders bringing foreclosure actions. [/FONT]
[FONT='Arial','sans-serif']Once the lender with which the borrower initially deals with grants the loan, it typically becomes part of a pool that contains thousands of other mortgage loans. Once such a pool is created, it’s offered to investors. [/FONT]
[FONT='Arial','sans-serif']A trustee bank oversees the pool’s operations to make sure that investors receive the payments borrowers make. However, there is no central repository for securitized mortgages, which can show up in more than one pool. [/FONT]
[FONT='Arial','sans-serif']Attorneys arguing for borrowers assert that trustees acting for investors frequently do not produce proof of mortgage ownership. [/FONT]
[FONT='Arial','sans-serif']Their assertions are supported by a recent study of 1,733 foreclosures conducted by University of Iowa associate professor of law Katherine M. Porter, which reported that 40 percent of the foreclosing creditors studied did not show proof of ownership. [/FONT]
"CDOs gain exposure to the credit of a portfolio of fixed-income assets ........."
In other words, the owner of a CDO does NOT own the underlying assets. They own the rights to the cash flow from the assets and the associated risks in accordance with the cash flow and risk assignment rules of the CDO.
The CDO owner has a position in a synthetic entity that has defined risk and reward. The owner is Dependant on not just the quality of the underlying assets, but also of the quality of the metrics and assumptions the CDO creator used for defining the risk and reward of the tranches.
So, the huge question is: if the CDO owner doesn't own the underlying assets, can they foreclose on them???
An Ohio court recently said "NO'.
Below is an article from Moneynews.com
[FONT='Arial','sans-serif']Trillions in CDOs Could Be Stuck in Court[/FONT]
[FONT='Arial','sans-serif']Another worry for big banks: They might have trouble even proving they own your home. [/FONT]
[FONT='Arial','sans-serif']The massive repackaging of loans into collateralized debt obligations (CDOs) — $6.5 trillion in outstanding securitized mortgage debt, by one estimate — is making it hard enough to price investment risk. [/FONT]
[FONT='Arial','sans-serif']But a recent court ruling could make it hard for banks to foreclose at all, adding to the potential losses as each case ends up in court instead, adding interminable legal time to the process. [/FONT]
[FONT='Arial','sans-serif']Ohio Federal Court Judge Christopher A. Boyko dismissed 14 foreclosures actions brought on behalf of mortgage investors. He ruled that they failed to prove their ownership of the properties on which they wanted to foreclose. [/FONT]
[FONT='Arial','sans-serif']In a nutshell, here’s the problem: Mortgage notes put in securitization pools typically appear as data transfers rather than actual legal transfers, a move intended to speed the process. [/FONT]
[FONT='Arial','sans-serif']However, if the mortgage note in question has not been legally transferred and assigned to the securitization trust, the trust has no legal standing to foreclose. [/FONT]
[FONT='Arial','sans-serif']“The institutions seem to adopt the attitude that since they have been doing this for so long, unchallenged, this practice equates with legal compliance. Finally put to the test, their weak legal arguments compel the court to stop them at the gate,” Boyko wrote in his ruling. [/FONT]
[FONT='Arial','sans-serif']Industry observers and consumer advocates note that mortgage securities make fixing troubled loans difficult because their complex structure and disparate ownership make identifying just who hold their mortgage notes difficult if not impossible. [/FONT]
[FONT='Arial','sans-serif']"This court ruling in Ohio means that the securitized trusts own nothing," according to Bob Chapman of the International Forecaster. "The investors in these securities might have assumed — wrongly, it turns out — that they actually owned some real estate in these deals. The problem is, they own nothing." [/FONT]
[FONT='Arial','sans-serif']The ruling involves foreclosure actions brought by Deutsche Bank National Trust Company, which acts as trustee for the mortgage securitization pools that claimed to hold the underlying mortgages DBNTC wanted to reclaim. [/FONT]
[FONT='Arial','sans-serif']Deutsche Bank attorneys provided documents that showed intent to convey mortgage rights rather than actual proof of mortgage ownership on the date the foreclosure actions were filed. [/FONT]
[FONT='Arial','sans-serif']The Ohio court’s action is expected to bolster the position of attorneys representing distressed borrowers and may encourage other judges to demand more compelling evidence of ownership from lenders bringing foreclosure actions. [/FONT]
[FONT='Arial','sans-serif']Once the lender with which the borrower initially deals with grants the loan, it typically becomes part of a pool that contains thousands of other mortgage loans. Once such a pool is created, it’s offered to investors. [/FONT]
[FONT='Arial','sans-serif']A trustee bank oversees the pool’s operations to make sure that investors receive the payments borrowers make. However, there is no central repository for securitized mortgages, which can show up in more than one pool. [/FONT]
[FONT='Arial','sans-serif']Attorneys arguing for borrowers assert that trustees acting for investors frequently do not produce proof of mortgage ownership. [/FONT]
[FONT='Arial','sans-serif']Their assertions are supported by a recent study of 1,733 foreclosures conducted by University of Iowa associate professor of law Katherine M. Porter, which reported that 40 percent of the foreclosing creditors studied did not show proof of ownership. [/FONT]
murray stroupe
Senior Member
- Joined
- Apr 27, 2005
- Professional Status
- General Public
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- Tennessee
Re; ETFC sells CDO type debt for about 27 cents on the dollar
Well that clears up the collateral question;
old fashioned banks & bankers are looking better all the time.
Some institutions, some investors look on the character of those involved also;
sure it could get worse for some.
Adding to the complexity, consumers & institutions may prefer to diversify business;
with Ford tractor,
with dealers selling unleaded gas,
& with dealers selling gas,& unleaded gas/ethanol cheaper,
with banks & financial institutions/others where their word actually means something.
Neat article on the complex court case.
===================
Well that clears up the collateral question;
old fashioned banks & bankers are looking better all the time.
Some institutions, some investors look on the character of those involved also;
sure it could get worse for some.
Adding to the complexity, consumers & institutions may prefer to diversify business;
with Ford tractor,
with dealers selling unleaded gas,
& with dealers selling gas,& unleaded gas/ethanol cheaper,
with banks & financial institutions/others where their word actually means something.
Neat article on the complex court case.
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